Technology has played a large role in the world we live in. With the invention of the internet, telephones, airplanes and the like, we are more connected to other countries than ever before. With a click of a button we can purchase an iPad from Apple and have it delivered to our house within a week. Seems like an easy feat, but if you consider that iPad is coming directly from a factory in China rather that the home office in Cupertino, California, it is easier to understand the meaning of a global economy. This paper will provide possible reasons that corporations grow into international businesses. It will also discuss the risks that domestic corporations have that are eliminated or minimized when the company goes international, and finally, it will discuss total and unique risks for multinational corporations.
Risks of a domestic corporation
One of the largest risks a domestic corporation faces is maintaining a competitive advantage compared to its competition. Corporations are created and stay in business as long as they are generating positive revenue; anything less would require the corporation to cease operations. Corporations that limit their existence to the domestic market due so at the risk of higher costs in the domestic market; one such example is the high corporate tax rate in the United States. It is no secret, especially during this election year that trade and corporate taxes are a hot issue, but it is true that the corporations in the United States pay some of the highest taxes in the world. The United States rate is 39% where GDP-weighted worldwide average is merely 30% (Aurenius, 2016). For some corporations, that could be the difference betw...
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... systematic; therefore, the company would still require a higher risk/reward payout.
According to Denis et. al (2002), global diversification harms a corporations value because the costs outweigh the benefit; but in a study conducted by Doukas and Kan (2006), they concluded increased foreign involvement actually increases bondholder value while decreasing shareholder value. This result shows that diversification does not erode the firm’s value.
All transactions, whether completed domestically or internationally, should be viewed in the framework of risk and reward payoff. The decision to move from a domestic firm to a multinational firm must take risk/reward payoff into consideration. Competitive pressures and slow growth in the domestic market can be offset by higher growth opportunities and attractive cost structures in the global market.
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